The Minimum Wage and Annual Earnings Inequality

WP#2018-7

Abstract

This paper provides an empirical analysis of the impact of the minimum wage on annual earnings inequality in the United States over the last three and a half decades.  We focus on men between the ages of 25 and 61, and use administrative Social Security earnings records from 1981-2015 from the U.S. Social Security Administration to measure annual earnings.

The paper found that:

  • Increases in the minimum wage reduce inequality below about the 12th percentile of the annual earnings distribution.
  • The increases are slightly larger than the impacts of the minimum wage on the bottom part of the hourly wage distribution, as measured in the CPS Outgoing Rotation Groups.
  • But they are not statistically larger, given the precision of the estimation, and they are larger than the impacts on annual earnings in the March CPS, consistent with measurement error in CPS annual earnings.

 
The policy implications of the findings are:

  • A typical increase in the minimum wage implies a 13.2 percent increase in annual earnings for minimum-wage workers at the bottom of the annual earnings distribution.
  • This results in a 1.85 percent reduction in inequality in the bottom tail of the annual earnings distribution.
  • The minimum wage is an important policy tool to decrease annual earnings inequality.